Fpa New Income Has 20-year Winning Streak

FUND WATCH - HUMBERTO CRUZ

January 21, 1996|HUMBERTO CRUZ

Here is a question for a trivia quiz: What's the only bond or stock mutual fund in the country that has gone 20 straight years without a loss? It's not from the big-name companies, so don't look among the funds from Fidelity, Vanguard, Twentieth Century or T. Rowe Price. Give up?

It's the lesser-known First Pacific Advisors New Income fund which, with about $226 million in assets, is only about three-quarters the size of the average bond fund.

Among the reasons for the winning streak: fund manager Robert L. Rodriguez, who says he's been "running scared" since becoming manager of the fund 11 1/2 years ago.

"Our focus on preservation of capital really paid off in 1994," said Rodriguez, 47, who was named manager of the year that year by Morningstar, a mutual fund rating service in Chicago. (Martinez also runs FPA Capital, a stock fund that gained 38.4 percent last year and 10.4 percent in 1994, when the Standard & Poor's 500 Index returned only 1.3 percent).

FPA New Income gained 1.46 percent in 1994, a year when interest rates rose sharply and the average bond fund lost 3.28 percent as the price of bonds declined. At one point Rodriguez had 32 percent of the fund in cash, settling for lower yields but protecting fund investors against principal loss.

That's a key of his philosophy, that bond investors should strive for total return, not yield. And that, over the long run, the way to get the most yield is to protect principal. Otherwise the investor could end up with less money to invest for yield. The current 12-month yield is 6 percent.

In 1995 FPA New Income gained 14.4 percent, just slightly under the 15.22 percent average for taxable bond funds, according to Lipper Analytical Services. But Rodriguez did it with less risk, sticking with higher-quality issues and refusing to extend maturities too long.

The fund's average maturity is a modest four years and five months, the duration a lower 3.84. That means share price would be expected to change about 3.84 percent, up or down, with a 1 percent change in interest rates.

Rodriguez concedes the bullish case for bonds is "quite vivid" now, as many economists predict the Federal Reserve will cut interest rates again and the yield on the 30-year Treasury bond may drop below 6 percent. But the mood could change, he said.

"A yield on long-term government bonds of around 6 percent presupposes a long-term inflation rate of around 21/2 percent," he said. "So there is very little room for error."

Other analysts agree. "If investors become absolutely certain rates are headed lower, chances are the reverse will take place," said A. Michael Lipper, president of the New Jersey-based firm that tracks mutual fund performance. "Absolute certainty is usually a prescription for an unpleasant surprise."

Which is why Rodriguez remains cautious, keeping 14 percent of the portfolio in cash as of Dec. 31.

The fund invests mostly in U.S. government-backed securities, which made up almost three-quarters of the portfolio at year's end. The prospectus requires that at least 75 percent of the fund's assets be in securities with the two highest quality grades, rated at least Aa by Moody's Investors Service and AA from Standard & Poor's.

Overall, he said, the fund will benefit if the bond market strengthens, although not as much. But if the bond market falters, the fund will hold up better than most.

"I think that is how conservative shareholders would want it," he said.